A controversial proposal cracking down on alleged ESG investing in public pensions — while supporting “discriminated” businesses in contentious industries — passed the Indiana House mostly along party lines Monday.
Forbes defines ESG strategy as investing in companies that score highly on environmental and societal responsibility scales as determined by third-party independent companies and research groups.
Advocates for ESG investing argue that they should use their investment funds in a way that reflects their values. Opponents say that results, not dogma, should drive investment strategies.
“House Bill 1008 is about freedom and fairness in financial markets,” bill author Rep. Ethan Manning, R-Logansport, said on the floor.
“ESG, or so-called environmental, social and governance policies, are highly subjective measures that have real-world impacts,” Manning added. “We need to focus our pension investments, the roughly $45 billion in assets we control, on financial factors, and leave politics and social and ideological considerations out of it.”
Democrats, meanwhile, argue the bill will harm, not help, pensions.
The House passed the bill 66-30, with all Democrats voting in opposition. Rep. Ed Clere, R-New Albany, also voted against the measure.
After its passage, a barrage of GOP representatives — nearly four dozen — signed on as co-authors. The bill now heads to the Senate for consideration. The Senate already passed a more streamlined version.
What does the bill do?
Manning’s bill defines what actions would count as ESG investing, like investor leeriness of specific protected industries: firearms, fossil fuels and more. And it would require the Indiana Public Retirement System and the Indiana State Police Pension Trust to divest from offending funds or cut ties with erring financial managers.
The bill bestows the power of enforcement upon Republican State Treasurer Daniel Elliott, who has professed his support for it. If Elliott thinks a fund or manager is violating the bill, he’d be able to investigate them — with the Office of the Attorney General’s help.
If Elliott decides they’re in violation, the pensions entities would have 180 days to start divesting, unless the INPRS or ISP boards decide that would actually hurt finances. Then, a board would have to make its rationale public.
The bill originally held external financial managers to the same standards as INPRS, applying in all activities — even to business dealings unrelated to Indiana’s pensions. A substantial amendment last week exempted private equity managers from key provisions and specified that the bill applies only to what managers do “on behalf of assets managed for the public pension system.”
The bill also includes limits on proxy votes, which are opportunities for shareholders to influence an entity’s management.
Last week’s changes eased INPRS’ fears and brought the bill’s price tag down, but that hasn’t satisfied Democrats, who continued to grill Manning on his intent and specific provisions.
Pension worries linger
A revised fiscal analysis says divestment could still cost INPRS a pretty penny.
“Potentially, the funds may earn a lower rate of return as a result of divestment, or if enforcement of the bill limits the pool of investment managers as a result of the requirements of the bill,” the analysis notes. And it says that if the funds don’t earn the expected 6.25% return on investment, Indiana and local government employers would have to pay up.
Democrats seized on that last week when they lobbed 10 proposed changes at the bill, mostly seeking to exempt specific funds. All the amendments failed in party-line roll calls or were ruled out of order.
On Monday, they criticized Manning for preserving the list of industries he said were “unfairly boycotted under ESG policies” and potentially impacting corporate diversity goals.
A string of firearms manufacturers and fossil fuel companies said in committee this month that financing, insurance and shipping servicers had gradually been declining to serve them because of their industries.
“The ‘fairness’ that you concern yourself with is fairness with industries that you like, (and) that you think other people disfavor,” Rep. Ed DeLaney, D-Indianapolis, told Manning on the floor. “That’s your fairness.”
Manning said it didn’t matter if he liked the industries, adding, “I just know some of these industries are performing very well, and we want them to be available for investment — not arbitrarily limited by the asset manager.”
Rep. Matt Pierce, D-Bloomington, also criticized the inclusion of Indiana’s civil rights code on a list of ESG criteria that would run counter to the bill.
“By voting for this bill, you’re going to say it’s the policy of this state to protect firearm manufacturers and fossil fuel companies,” Pierce said, “while prohibiting anything that would prevent, in the corporate setting, discrimination against all the people that have suffered discrimination in the past. … What century are we in?”
Manning pushed back.
“This doesn’t change our civil rights statutes. You cannot discriminate based on the protected classes that we’ve lay out,” he said. “What we’re saying is you can’t institute these quotas and things on corporate boards without having a financial reason for doing so.”
The Indiana Capital Chronicle is an independent, not-for-profit news organization that covers state government, policy and elections.